Fed's Rosengren Sees 'At Least' 3 Rate Hikes Per Year

The Federal Reserve may need to raise interest rates a bit more aggressively than the thrice-per-year pace forecast by Fed policymakers if the U.S. economy picks up steam as expected, a pragmatic Fed official said on Wednesday.

Boston Fed President Eric Rosengren, a long-time dove who last year switched tack and began pushing for tighter monetary policy, said he expects the U.S. central bank to raise rates "at least as quickly" as the median Fed forecast from December.

That forecast, based on 17 Fed policymakers, predicted three hikes in each of the next three years as inflation edges up to a target and gross domestic product (GDP) growth remains around 2 percent.

But Rosengren, who dissented once in 2016 but does not have a vote on policy this year, said in a speech he expects a bit stronger GDP growth over the next two years as unemployment, now 4.8 percent, keeps falling below that equilibrium level.

"It will likely be appropriate to raise short-term interest rates at least as quickly as suggested by the Fed's current ... median forecast, and possibly even a bit more rapidly," he said. "If GDP is growing faster than potential and we reach both elements of the dual mandate, the Federal Reserve risks overshooting" those employment and inflation mandates, he added.

The Fed has tightened policy only twice in the last two years, bringing the key rate to a range of 0.5-0.75 percent. But expectations have grown for more hikes as investors anticipate that U.S. President Donald Trump and the Republican-controlled Congress will increase spending and cut taxes, and as low unemployment continues to boost wages.

Rosengren said such so-called slack in the labor market is now "very limited," meaning inflation could rise more than expected. Yet he added that uncertainty around future fiscal policies as well as economic growth overseas stand out as "significant risks" to his relatively optimistic expectations.

Meanwhile, Philadelphia Federal Reserve Bank President Patrick Harker also repeated his view that the U.S. central bank should continue to raise interest rates this year, now that the U.S. economy is mostly back to full health.

Inflation, Harker said in remarks prepared for delivery to an economic outlook lunch hosted by La Salle University in Philadelphia, should be back to the Fed's 2-percent goal by late this year or next. Unemployment, at 4.8 percent, is already at or below levels consistent with full U.S. employment, he added.

"I see three (interest-rate) hikes as appropriate for 2017, assuming things stay on track," said Harker, one of the Fed's 10 voters this year on monetary policy. "With employment generally at our goal and inflation on track to meet it, the issue now is growth."

The U.S. economy, he forecast, will likely grow a touch faster than 2 percent this year. To boost it higher, he said, requires broad economic policies that can speed up productivity growth and bring more people into the labor force.

"The solutions to these problems lie in areas outside monetary policy," he said, adding that possible approaches include investment in education and infrastructure as well as pulling more people into the U.S. labor force from other countries.

The Federal Reserve may need to raise interest rates a bit more aggressively than the thrice-per-year pace forecast by Fed policymakers if the U.S. economy picks up steam as expected, a pragmatic Fed official said on Wednesday.